Hong Kong: Back In Business

Sometime in the middle of September last year, the busy financial district of Hong Kong was left paralysed when more than 10,000 students descended into the area – protesting what they called an encroachment of China’s political will on Hong Kong’s governance.

Collectively called ‘Occupy Central,’ these protests kept growing over the next month, at one point swelling to almost 80,000 protestors, according to some news outlets. The scenes of students, some still in secondary school, facing off against the city’s uniformed custodians, left many to wonder if the Asian economy’s shining light could slowly dim.

Walking the streets of Wan Chai, which saw some of the most intense protests, on the way to the Asian Financial Forum 2015 (AFF), there was little sign of the unrest that gripped the city only two months ago.

At the forum itself, which is now in its eight year, it was evident that the community of more than 2,000 investors, private equity players, high net-worth individuals, and senior consulting and financial services professionals believed that the protests were but a minor blimp in the successful economic story that is Hong Kong.

DENTED BUT NOT DAMAGED

A senior executive with a professional services firm in Hong Kong, who requested to be anonymous, said that the protests were unnerving but the somewhat-peaceful resolution of the protests has calmed the business community in the city.

“With the protesters blocking the financial district, of course it was not an issue that we could just overlook and go about thinking it is work as usual,” he says. “The protests were new to us… Hong Kong is an intense, politically aware city but it had never seen protests at such a mass scale.”

However, he does not believe that the protests have turned the global financial and business community away from Hong Kong. “I think that it would continue to be a major centre of trade and you will continue to see it rise in conjunction with the growth of the larger Asian economies.

“I believe that the leadership would take necessary action to assuage both the city’s young demographic and the community of businessmen who are behind its economic engine.”

It helped that on day one of AFF, Jack So, chairman of the Hong Kong Trade Development Council (HKTDC), acknowledged the Occupy Central protests, and that they were being resolved peacefully.

CY Leung, chief executive of the Hong Kong Special Administrative Region (SAR), and one of the main targets of the Occupy Central protestors also reiterated that Hong Kong remained the go-to city in Asia for entrepreneurs and investors – especially those interested in China.

HK TO BE A RENMINBI HUB

Speaking at the forum, Leung emphasised that investors recognise that Hong Kong enjoys the combined advantage of “One Country” and “Two Systems”.

“When you are in Hong Kong, you are in China, but you are not in just any other city in China. We have something special to offer that other Chinese cities don’t,” he said.

Hong Kong’s “super-connector” role between the Mainland and the rest of the world is clearly reflected in the launch of the Shanghai-Hong Kong Stock Connect in November last year, he noted, giving an example.

With Stock Connect, institutional and retail investors can invest directly in eligible Renminbi-denominated Mainland A-shares, while Mainland investors can now trade in Hong Kong stocks.

According to Leung, Stock Connect consolidated Hong Kong’s position in the internationalisation of the Renminbi while opening up opportunities for Mainland investors.

Many experts at AFF noted that with the trend towards the internationalisation of the Renminbi, and China’s firm push behind it, Hong Kong would only grow in economic strength from here on.

Under China’s 12th Five-Year Plan, Hong Kong is being positioned as an apex offshore Renminbi business hub and the city is in talks with Beijing to strengthen this in the next Five-Year Plan. “We are confident that Hong Kong will remain the leading offshore Renminbi centre, despite the growing number of financial centres trading in the Renminbi,” said Leung.

“There is also huge potential from overseas companies eager to explore the option of settling their China trade in Renminbi rather than, say, the US dollar.”

According to government data, in the first half of 2014, about 32 per cent of foreign direct investment into Mainland China, and about 18 per cent of outward direct investment from the Mainland, was conducted in Renminbi.

Standard Chartered also forecasted that by 2020, some 28 per cent of international trade will be Renminbi- denominated and by 2015 more than half of China’s trade with emerging markets will be settled in Renminbi.

Dr. Nasser Saidi, founder and president of Nasser Saidi & Associates, said in a recent op-ed for Gulf Business that given that China is the biggest consumer of oil from the Gulf nations, the GCC needs to rapidly become part of the Redback zone.

“Given the growing level of China-GCC trade, a growing share will be cleared using Renminbi and eventually GCC oil and gas exports will be priced in Yuan. The GCC needs to take active steps to facilitate the use of the Renminbi and integrate it into the region’s payment systems.”

ATTRACTING INVESTORS

Hong Kong’s financial secretary, John C Tsang, was one other key government executive reassuring investors that the city would continue to be a centre of financial trade.

Tsang, speaking the forum, said that Hong Kong’s asset-management industry had seen robust growth over the past decade or so.

At the end of 2013, the combined fund- management business in Hong Kong had climbed to $2 trillion, up 27 per cent over the previous year, he revealed.

“And we’re working to make it even stronger,” he added.

One of the key measures they are indulging in this regard is to extend the profits tax exemption for offshore funds to private equity (PE) funds.

“Indeed, we expect to introduce a Bill on this into our legislature shortly.”

Tsang pointed out that Hong Kong is a key player in regional PE funds and that more than 350 companies here manage PE funds, with the capital exceeding $110 billion.

“Over 70 per cent of our fund- management business comes from non-Hong Kong investors, and our fund managers invest almost 80 per cent of their clients’ funds outside Hong Kong.

“The extension of the profits tax exemption to private equity will broaden our fund-management business, boosting Hong Kong’s reputation as a full-service asset-management hub,” he added.

STABLE FOR BUSINESS

According to Benjamin Hung, regional chief executive officer, Greater China at Standard Chartered Bank (Hong Kong), the affluent middle class has further emboldened the wealth management scenario.

“The growing middle-class affluent sector represents a huge opportunity because this section of the population is constantly looking for ways and avenues to preserve their wealth and to distribute and diversify their assets,” he said.

“Hong Kong sits in a very advantageous position simply because of China, which is the fastest growing wealth-creation nation in the world.”

Cheah Cheng Hye, chairman and co-chief investment officer, Value Partners Group agreed and said that Hong Kong had great location and timing. He, however, expressed serious concerns that the Occupy Central protests could derail Hong Kong’s financial reputation.

“What happened last year in the form of the Occupy protest movement was, in fact, an uprising against the system in Hong Kong,” he said.

“Although this rebellion was non-violent essentially, it raises some very awkward questions. For a financial centre to function properly, the precondition is that the society must be stable, and the social consensus must be strong. So, in a sense, Hong Kong’s worst enemy is Hong Kong.”

Though she acknowledged the questions raised by the Occupy protests, Kathryn Shih, head of Wealth Management Asia Pacific, and group managing director at UBS AG, said that Hong Kong’s well-developed systems gave it an edge as an international wealth management centre.

“It has a well-developed rule of law, and I think that’s the prerequisite of wealth management,” she said. “People need to know that a contract stands in Hong Kong. We have very [strong] trust rules, also a robust regulatory framework that protects investors.”

Barry Stowe, CEO of Prudential Corporation Asia, on the other hand suggested that it was important to put last year’s protests into context, and their impact on business.

“When you look at Hong Kong, the future is very bright,” Stowe said. “There continues to be wealth created here, there continues to be an influx of mainland customers, and an increase in customers from other markets coming here.”